State entities’ governance systems keep failing — AG

While state entities have made progress towards compliance with certain regulations governing their operations, especially the regular submission of financial statements, they seem to be going in the opposite direction regarding governance issues, following a spike in such cases reported by the Auditor General.

Acting Auditor General (AG), Rheah Kujinga, highlighted in his latest report for the period 2023 that, while most state entities had made significant progress in compliance on several key issues, such as the preparation of financial statements, governance-related deficiencies shot up from 170 in 2022 to 310 in 2023.

Overall, out of the 388 audit issues raised by the Auditor General in the 2022 report, only 132 were fully addressed, 77 were partially addressed, while the bulk of the concerns, 177, were not attended to completely. A total of 191 state entities were audited in the 2023 financial year.

State entities used to account for an estimated 40 percent of Zimbabwe’s Gross Domestic Product, but this figure has plummeted to as low as 2 percent due to mismanagement, poor governance, and weak internal controls.

Due to poor performance and perennial losses, most of the state entities had become heavily dependent on fiscal handouts, putting further strain on already stretched public resources.

The primary purpose of financial statements prepared by state entities is to provide relevant and reliable information to users about a reporting entity’s financial position.

The users of the financial statements include various stakeholders, among them ministers, Parliament, development partners and the public in general.

The Auditor General’s mandate is set out in the Constitution of Zimbabwe Amendment (No. 20) Act 2013 and is also supported by the Audit Office Act [Chapter 22:18], which require him to audit and report to Parliament the findings on the examination of accounts of all public entities.

“In this report, there are instances of weak internal controls as evidenced by unsupported expenditure, non-alignment of accounting policies and processes with reporting framework (accounting standards), outdated accounting manuals, non-compliance with tax laws and regulations, non-performance of bank reconciliations and absence of internal audit arrangements,” said Kujinga.

Issues identified by the Auditor General fell under seven broad categories, including revenue collection and debt recovery, management of assets, procurement of goods and services, service delivery, employment issues and management of investments.

The AG, however, appreciated efforts made by the Government in the form of statutory/structural reforms, inter alia, enactment of the Public Entities Corporate Governance Act and establishment.

The AG’s 2023 report also noted the establishment of the Corporate Governance Unit (CGU) in the Office of the President and Cabinet, including the requirements for senior management to sign performance contracts.

“This has resulted in most entities having boards of directors. In this regard, I urge boards to pay attention to matters that I have raised so as to improve transparency and accountability by strengthening their internal audit units/arrangements,” Kujinga said.

According to the World Bank, state enterprises and parastatals (SEPs) play a major role in the provision of infrastructure and services like water, electricity, telecommunications, transportation, health and education, among others.

“In some cases, SEPs are involved in advancing state policy. Ensuring that SEPs are accountable, transparent, efficient, effective and viable is important for the country’s efficient allocation of resources, competitiveness, economic development and poverty alleviation,” the World Bank says.

SEPs are assets owned by the state on behalf of the public.

In terms of identified deficiencies, the AG said she had noted issues of revenue leakages, long outstanding debts, and deposits not receipted on time, which contributed to the entities’ net liability position with a potential risk of threatening the sustainability of service.

“I have raised thirty-one (31) issues on revenue collection, and twenty-six (26) entities had reports on (going concern) matters arising from continued operating losses/deficit, under-capitalisation, and liquidity challenges.

“These conditions, if not addressed, may cast significant doubt on the entities’ ability to continue operating as a going concern,” Kujinga noted.

A total of 22 issues on the management of assets from 15 public entities were raised in the latest report. Most of the issues relate mainly to asset record keeping, lack of due diligence in the placement of investments, and maintenance of assets, which remain a challenge and may compromise service delivery.

The AG said she had also noted an increase in procurement issues from 20 to 33 issues, with the majority of his findings centered on non-delivery of goods and services, non-declaration of interest during procurement evaluation, procurements with insufficient supporting documentation, for instance, no invoices and quotations.

Kujinga said there may be a need to strengthen the due diligence processes to include the evaluation of the capacity to deliver goods to be procured.

On the issue of audit matters from previous years, Kujinga said; “I followed up (on) 388 audit findings that were in the 2019 – 2022 reports and noted that 32 were addressed, 77 were partially addressed, and 179 were not addressed.”

She said the issues raised in the Auditor General’s report, if not addressed, service delivery, achievement of mandates, and efforts made to enhance transparency and accountability through the various instruments in place may be compromised.

“Those charged with governance and management are urged to pay attention to the outstanding audit findings so as to address them and improve transparency, accountability and good corporate governance,” she said.

The World Bank says a 2016 survey of SEPs to assess the level of awareness of, and compliance with, existing corporate governance requirements revealed that most SEPs did not have any effective performance management systems in place. The Bretton Wood institution also noted that where such systems did exist, they were found to be weak and largely ineffectual in terms of enabling effective monitoring of target-based performance of SEP Boards and Management by line ministries. -ebisnessweekl